Cutting infrastructure spending and focusing on P3s bucks global consensus, means less bang for the buck

by Ricardo Acuña

EDMONTON, AB —There is a growing consensus around the world that increased government investment today in public projects and services, especially in infrastructure, will help ease the pain of the current economic crisis by putting people back to work and getting money moving again.

This is especially the case in a jurisdiction like Alberta, where the construction industry makes up almost 25 percent of the provincial economy, and is the second largest employer of Albertans, only slightly behind the retail sector.

The reality of Alberta's recent boom is that it was predominantly a construction boom - the vast majority of jobs generated during that period of astronomical growth were created in the construction sector. It only stands to reason, therefore, that as the boom turns into a bust, it is those construction jobs that are disappearing even more quickly than they were created. If there is any place in North America where significant government investment in infrastructure would get people back to work quickly it is here in Alberta.

Add to that the reality that the province still faces a significant infrastructure deficit after almost 15 years of complete neglect by a government obsessed with balancing the books and paying off debt, and you get a sense of why the Alberta government has been working so hard to play up the amount of infrastructure investment in the 2009 provincial budget released earlier this month.

The budget documents highlight the fact that the government will invest $7.2 billion in infrastructure this fiscal year. What they don't mention, however, is that this is not new spending. In fact, it is actually $300 million less than what the government said it would spend this year when it published its three-year capital plan last year. Cutting infrastructure spending by $300 million is actually the opposite of investing new money to put Albertans back to work.

That $300 million cut represents close to 10,000 construction jobs that will not be created in Alberta this year. So, at a time when there is almost universal consensus on the need for stimulus spending, the Alberta government has chosen to cut its infrastructure budget and kill jobs rather than increase it and create jobs.

But there is also another concern about how the government is dealing with infrastructure spending in this year's budget. In a presentation to the Calgary Chamber of Commerce last week, Alberta infrastructure minister Jack Hayden suggested that the province would make extensive use of public-private partnerships (P3s) for new facilities such as seniors' lodges and health centres.

Despite government assurances to the contrary, P3s have never made sense either financially or democratically, and they make even less sense in today's economic climate.

P3s are an arrangement whereby governments contract with a private company, or a consortium of companies, to plan, design, finance, build and maintain public infrastructure projects for an extended time period - usually 25 to 50 years. In return, government agrees to pay a pre-set amount annually for the life of the agreement.

Because these private companies must build profit into every stage of the project, and because they are not likely to invest in expensive maintenance and upgrades that will result in them losing money, P3s around the world have tended to result in higher costs to taxpayers and a lower standard of maintenance and upkeep over the life of the project. Rather than being a cost-saving measure, P3s have proven themselves to be a cost-deferral tactic for governments - they cost more over their lifespan, and future generations are on the hook for shoddy maintenance and neglected upkeep after the contract is up. In addition, because the contracts are with private companies, their specific provisions are protected from public scrutiny by protection of privacy legislation.

In addition to having to the extra costs associated with profit margins built in by private companies, a significant cost escalator for P3s is financing. That is because governments in general, and the Alberta government in particular, can borrow money for cheaper than any private sector company. The premium for government borrowing has historically been in the neighbourhood of two percent better than what the private sector can borrow for.

In the midst of the current financial crisis, lenders have become more risk averse than before, and as such are much more reluctant to extend credit at low rates for long periods of time. The result of this dynamic is that the cost of borrowing for private companies today, assuming they can even get credit, is even higher than it was just a year ago. The combination of the dubious history of P3s and nervous lenders also means that the cost of insuring that financing is also higher than ever before.

The result is that P3s make even less sense financially today than they ever have before. Why would a government ostensibly concerned with fiscal prudence even consider an infrastructure scheme that costs more and is less accountable, especially during a time when every extra dollar that goes to higher interest rates, insurance costs and private profit margins means one less dollar that can be put to use putting Albertans in the construction industry back to work?

The global community is now in agreement that's what needed in this time of crisis is responsible and accountable fiscal stimulus. Our government, on the other hand, seems obliviously intent on continuing to pad the bottom lines of their friends in the private sector and ignoring the needs of Albertans who are losing their jobs by the thousands. Now is the time for some vision and investment in the public interest, and infrastructure spending cuts and wasteful P3s offer neither.

Ricardo Acuña is executive director of the Parkland Institute, a non-partisan public policy research institute housed at the University of Alberta.